Transport Select Committee call for evidence – Coronavirus: implications for transport
7th May 2020
Heathrow welcomes the opportunity to respond to the Transport Select Committee’s call for evidence on the Coronavirus (COVID-19) implications for transport. COVID-19 has created the biggest crisis the aviation sector has ever experienced, and there is a risk that it becomes devastating not just to our industry, but to all other sectors of the economy that rely on aviation.
The way in which aviation comes through this crisis will help determine how the UK economy comes through this crisis. If aviation succeeds, the economy may succeed. If aviation fails, the economy will fail. We encourage the Government to provide the sector with the necessary support to help underpin the country’s social and economic recovery from Coronavirus, through facilitating trade, tourism and FDI.
Aviation is the cornerstone of the UK economy.
The UK’s aviation industry is the third largest in the world, reflecting the strength of the UK economy, the fact that we are a trading island nation, and 100 years of innovation and leadership. We are one of only three countries in the world with leading positions in all parts of the value chain; aircraft and engine manufacturing, oil, airlines and airports. We employ hundreds of thousands of people directly. Much of this is clustered around airports, with 76,000 employed at Heathrow alone. One in four local households rely on Heathrow for their livelihood. Airports are also an economic catalyst, for example, thousands of employers base their headquarters around Heathrow because of easy access to global markets.
Aviation is not just another economic sector. It is the cornerstone of the UK economy. Forty per cent by value of UK exports to non-EU countries go in the cargo hold of passenger planes from Heathrow every year. Anything high value, with a short shelf life or a just in time supply chain goes on a passenger plane from Heathrow. A similar proportion of imports come in through Heathrow as well – including 41% of UK pharmaceutical imports – providing organisations with their just in time supply chain.
Until regular flights can be restored, the UK economy will be held back; hotels will be empty, factories will struggle to get parts and exports won’t get to market – leaving international competitors to take markets UK business has spent years to build up.
Impact on our business and industry is the biggest crisis in aviation’s history
As the UK’s major hub airport, in normal times Heathrow connects all of Britain to global markets. In these abnormal times, we are acting as an airbridge for the UK, and playing our part as a responsible business to support the national response to the health crisis, to protect as many jobs as possible and to save our business. We have been determined to keep Heathrow open provided it is safe to do so, ensuring critical medical supplies can be brought into the country to support the NHS and working with the UK Government to repatriate British citizens. Last week we supported over 50 repatriation flights carrying 14,000 passengers, as well as 520 cargo-only flights last week.
It’s hard to believe 2019 was Heathrow’s busiest year ever, with 81 million passengers. We are now operating from a single runway and have consolidated operations into Terminals 2 and 5, with passenger numbers expected to be down by over 97% in April. We expect this trend to continue until governments around the world deem it safe to lift travel restrictions. We have strong financial resources and can survive for 12 months without passengers. However, we are burning through £200 million of cash every month – due to the high level of fixed costs – which is being funded by investors. But this is unsustainable.
We have acted quickly to conserve cash; we have cut capital expenditure by over £600 million, and operating costs by 30%. This is being achieved by cutting executive pay and reducing salaries (but not below the London Living Wage), renegotiating all contracts, and consolidating operations into two terminals. We are grateful for the Government’s Job Retention Scheme which has led to over 3,000 of our 7,000 colleagues being furloughed. We have reduced management numbers by a third but have not yet implemented any frontline cuts. Whether we do so, and how deep we cut, will depend on whether there is any prospect of a material increase in flying in the next few months, alongside any Government action which would instil confidence in aviation’s recovery.
Other UK airports have taken similar steps, though few have the financial resources of Heathrow and are facing starker choices. Some have already closed, some have suspended operations, and some remain open, but with no flights. Airports still incur many of the fixed costs of remaining open even on skeleton operations. In addition to financing, these include; business rates; policing; maintenance to keep airfield and terminal systems operational; security to maintain the perimeter and airside/landside boundary; contracts that cannot be legally terminated and; salaries for roles with critical expertise. These fixed costs put the aviation industry under huge pressure.
Aviation’s recovery needs to be planned now
Until there is a vaccine or cure, there is likely to be need for strong health measures during the aviation journey. We anticipate this will involve a package of measures including: some form of health screening so that anyone with a high risk of carrying the disease is not allowed into the airport; minimising contact between passengers and airport workers; excellent levels of hygiene, especially where people have to touch something, such as hand rails. Minimising contact on-airport will likely involve the use of surgical masks, shielding workers with screens – as in supermarkets – and increasing use of automation, such as extending the eligibility to use e-gates in immigration.
We believe that there needs to be a Common International Standard for health in aviation and that the UK Government could provide a lead in defining this, just as they have done with security standards. In our view, any measures agreed must meet three criteria:
(i) They must be medically effective;
(ii) They must be something that meets consumer expectations, in terms of safety, security, and convenience; (iii) They must be something that airports can implement and deliver.
We are already working with the aviation industry and policy makers here and in other countries to establish consensus on the need for a common standard of future measures. On health screening, PHE has concluded that temperature testing at airports is ineffective once community transmission of the virus is widespread. However, it does not mean that it will not have a role to play once community transmission has been brought under control. Similarly, social distancing in any form of public transport system is something which is only possible with very low passenger numbers. It may have a role to play while demand is limited to repatriation and domestic flying, but is not a solution at any scale and would compromise full recovery.
Aviation must build back better
In hindsight, it is now possible to see that some of the early warnings of a pandemic were missed by governments across the world, at huge personal and economic cost. It would be easy to forget about carbon reduction in the face of this crisis, but it would be an even bigger mistake to miss the early warnings of climate change and jeopardise the progress which was made pre-COVID-19.
The UK aviation sector has taken a global lead in committing to meet the Paris Accord target of net zero emissions by 2050. The plan should be to accelerate this, not slow down. For example, as part of any post-crisis economic regeneration plan, the Government could stimulate development of a scale Sustainable Aviation Fuel production in the UK, with the investment and jobs which would accompany it. Similarly, any company-specific recovery plans for carbon intensive industries, including aviation, should come with a commitment to faster decarbonisation.
Government, regulator and policy support for the UK aviation sector
The COVID-19 crisis is a further example of the need for our existing regulation to adapt and change to suit the reality of conditions faced by our business today. Heathrow, which has been operating at capacity for 15 years, is the only UK airport subject to full economic regulation and prices capped by the regulator; a model designed for businesses where demand is stable, such as water utilities.
What this crisis has demonstrated is that demand for airports is not stable and that the CAA’s approach does not give sufficient reward to cover the asymmetric risk faced by airport investors. This is evidenced by the fact that Heathrow investors have not made the level of return deemed appropriate by the regulator throughout the last 20 years. This model will not attract future investment which will be required to support industry – and economic – recovery, especially in light of the financial catastrophe of the COVID-19 crisis and needs a complete overhaul.
It is increasingly clear that when recovery from COVID-19 comes, it will not be a case of returning to the way things used to be. The policy decisions that are taken over the next few months will have a huge impact on how the UK economy recovers and whether the UK remains a leading player in global aviation. Consequently, this timely review by the Committee is very welcome and Heathrow looks forward to engaging with Members as we work through the implications on aviation in the months ahead and work towards priority policy changes. These include:
Encouraging the Department for Transport to lead the definition of an International Common Standard for screening measures in aviation, the first step of which should be to work at pace to agree a common set of measures amongst UK airports, which is aligned to Europe in order to support the restart of aviation.
Waiving business rates payments for all airports for 12 months, as the Scottish Government has done, or quickly re-rate Business Rates values, so the amount paid is proportionate to the actual size of the operation.
Extending the Job Retention Scheme beyond June, at least on a sectoral basis, as recovery in aviation is likely to
lag behind many other sectors
Widening eligibility to use e-gates in immigration to visa holders and additional countries to reduce contact points.